I am in Slovenia today, talking to bankers, entrepreneurs, managers, politicians, government officials and academics. The story is the same here as in every country I have visited since mid-September 2008: the banks aren’t lending. They don’t lend to each other. They don’t lend to non-financial businesses and they don’t lend to households.
In Slovenia I have been told that the banks are both solvent and liquid. I have no way to verify the solvency claim. Based on my observations of the universal ’bankers’ Dance of the Seven Veils’ – where a deeper financial hole is revealed every time a veil is dropped – my benchmark position is that there is no such thing as a ‘stand-alone’ solvent cross-border bank in the north Atlantic area any longer. All those that keep their head above water do so because of the explicit or implicit financial support of the state, which now has effectively underwritten their balance sheet.
But given the capital injections, guarantees and other forms of financial support extended by the state, a lot of banks are liquid and capable of lending. They refuse to do so.
Where just a year and a half ago, hubris, recklessness, overconfidence and rampant optimism ruled, we now have fear bordering on panic, total lack of confidence, timidity and pessimism verging on institutional clinical depression. The loan officers are brow-beaten and rendered impotent by internal risk controllers. The bean counters are in charge. ‘What you don’t lend, you can’t lose’ is the new micro-prudential ethic. The macroeconomic consequences of this lending paralysis are potentially disastrous. It could turn a global recession into a global depression, with many years of stagnation and cumulative declines of GDP of 10 percent or more.
So, what is to be done? These are extraordinary times that could become desperate times. I propose the following form of forced lending by banks to non-financial businesses. Every loan that matures during the coming year gets extended/renewed for another year on the same terms as the maturing loan. This applies to both secured and unsecured loans. Likewise every credit line or overdraft facility that expires during the coming year gets extended/renewed for another year. Expiring loans, credit lines or overdraft facilities that had an original maturity of less than a year or more than a year will have the same interest rate and other conditions for the one-year extension/renewal as the original arrangement.
This proposal is an application to bank lending to non-financial corporates of a proposal made by Anne Sibert and myself for adding automatic debt roll-over options to lending to sovereign borrowers (see Willem H. Buiter and Anne C. Sibert (1999) “UDROP: A Contribution to the New International Financial Architecture”, International Finance, Vol. 2, No. 2, pp. 227-247, July). The main difference is that the addition of the rollover option would be for one year only, it would be retroactive and it would be at no additional charge to the borrower. It would clearly be a violation of normal commercial practice and an infringement of voluntary exchange. So be it.
Banks that refuse to go along with this request would lose their banking licenses. Alternatively, they would be fined the full amount of the maturing loans (expiring credit lines, overdraft facilities) that they refuse to extend/renew.
Measures in the spirit of this proposal, even if different in detail, will, in my view, be required to bridge the gap between micro-rational behaviour (don’t lend) and macro-rational behaviour (don’t starve the non-financial business sector of credit).
Banks in the north Atlantic region have been effectively socialised by the protective shield of capital injections, liquidity facilities, debt guarantees and other forms of financial support. So far, there have been only benefits for the banks, their management, their creditors, debt holders and shareholders from this socialisation. It is time to give something back.
A one-year interval of forced lending to non-financial corporations is a small price to pay for the banks in return for the massive tax payer largesse they have been shown. From a macro-prudential perspective, it would certainly beat a continuation of the current lending paralysis. Banks fulfill no socially useful function if all they do is survive. Lending is their raison d’être. If banks don’t lend to the real economy, there is no reason for them to be in business at all.